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Is expenditure incurred on issue of shares/debenture allowed under income tax act?
When a company incurs costs for issuing shares or debentures—such as underwriting fees, printing expenses, and other related costs—these expenses are generally considered capital in nature rather than revenue expenses. Key Points to Note: Capital Nature of the Expense:Costs incurred in raising capitRead more
When a company incurs costs for issuing shares or debentures—such as underwriting fees, printing expenses, and other related costs—these expenses are generally considered capital in nature rather than revenue expenses.
Key Points to Note:
Capital Nature of the Expense:
Costs incurred in raising capital (by issuing shares or debentures) are treated as capital expenditure. They are part of the process of financing the company and are not directly linked to generating regular business income.
Non-Deductibility Under the Income Tax Act:
Since these expenses are capital in nature, they are not allowed as a deduction when computing taxable income. In other words, you cannot reduce your current year’s taxable profits by the amount spent on issuing shares or debentures.
Treatment as Capital Expenditure:
Instead of a direct deduction, such expenses may be capitalized. Depending on the applicable accounting and tax provisions, they might be written off over a period through amortization or depreciation if the law permits, but they are not deducted immediately as a revenue expense.
Relevant Provisions:
Section 37 of the Income Tax Act, 1961:
This section generally allows deductions for revenue expenses incurred wholly and exclusively for business purposes. However, since the issuance expenses are of a capital nature, they do not qualify under this provision.
Conclusion:
In summary, the expenditure incurred on issuing shares or debentures is treated as a capital expense and is not allowed as a deduction in the current year under the Income Tax Act. It does not directly reduce your taxable income.
See lessHow to get deduction of expenditure incurred in case of amalgamation/demerger?
When a company incurs expenses exclusively for the purpose of amalgamation or demerger, it can claim a tax deduction for these expenditures under the Income Tax Act. What You Need to Know Relevant Provision:The deduction is provided under Section 35DD of the Income Tax Act, 1961. Eligibility: Only IRead more
When a company incurs expenses exclusively for the purpose of amalgamation or demerger, it can claim a tax deduction for these expenditures under the Income Tax Act.
What You Need to Know
Relevant Provision:
The deduction is provided under Section 35DD of the Income Tax Act, 1961.
Eligibility:
Only Indian companies that incur expenditure wholly and exclusively for amalgamation or demerger qualify.
The expenses must be directly related to the restructuring process.
How the Deduction Works:
The entire expenditure is not deductible in a single year. Instead, it is spread out over five consecutive financial years.
This means you can claim 20% of the total expenditure each year as a deduction.
Step-by-Step Illustration
Expenditure Incurred: Suppose your company incurs ₹50 lakhs in amalgamation/demerger expenses during the financial year.
Annual Deduction:
Claim 20% of ₹50 lakhs = ₹10 lakhs per year.
Deduction Period:
You will get this deduction each year for five financial years (i.e., ₹10 lakhs per year for 5 years).
Important Considerations
Documentation:
It is essential to maintain proper documentation and records that demonstrate the expenses were incurred solely for amalgamation or demerger purposes.
Exclusivity:
No other tax deduction is available for these expenses under any other section. This is the only relief provided for amalgamation/demerger costs.
Key Takeaway
By spreading the deduction over five years, Section 35DD helps ease the tax burden on companies undergoing corporate restructuring, making it more manageable to recover the costs associated with amalgamation or demerger.
See lessWhat id the deduction of expenditure incurred on VRS?
Expenditure incurred on Voluntary Retirement Scheme (VRS) is allowed as a deduction under Section 35DDA in a phased manner, rather than a one-time deduction. ✅ Deduction Allowed under Section 35DDA The total amount of VRS compensation paid to employees is allowed as a deduction over 5 years. 20% ofRead more
Expenditure incurred on Voluntary Retirement Scheme (VRS) is allowed as a deduction under Section 35DDA in a phased manner, rather than a one-time deduction.
✅ Deduction Allowed under Section 35DDA
The total amount of VRS compensation paid to employees is allowed as a deduction over 5 years.
20% of the total VRS expense is deductible each year for five consecutive years, starting from the year in which the payment is made.
Deduction is available only if the payment is actually made to the employees opting for voluntary retirement.
⛔ When Deduction is NOT Allowed?
❌ If the business fails to make the payment to employees, deduction is not allowed.
See less❌ If the business claims the entire amount in one year, the excess claim may be disallowed by tax authorities.
❌ If the employee retires under any scheme other than VRS, this section does not apply.
Is bonus or commission given to employees allowed as deduction?
As per Section 36(1)(ii), any bonus or commission paid to employees is allowed as a deduction while computing business income, provided it meets certain conditions. ✅ Conditions for Allowing Deduction 🔹 Must be paid to an employee – The payment should be made to an employee and not to proprietors, pRead more
As per Section 36(1)(ii), any bonus or commission paid to employees is allowed as a deduction while computing business income, provided it meets certain conditions.
✅ Conditions for Allowing Deduction
🔹 Must be paid to an employee – The payment should be made to an employee and not to proprietors, partners, or directors who are also shareholders.
🔹 Should not be in lieu of dividends – If the commission or bonus is paid instead of distributing profits as dividends, the deduction is not allowed.
🔹 Actual payment is required – As per Section 43B, the deduction is allowed only when the bonus or commission is actually paid before the due date of filing the income tax return.
🔹 Should be reasonable – The payment should be genuine and reasonable as per the business needs; otherwise, tax authorities may disallow it under Section 40A(2) (excessive or unreasonable payments).
⛔ When Deduction is NOT Allowed?
❌ If the bonus/commission is payable instead of a dividend to shareholders.
❌ If the payment is not actually made by the due date of filing the return.
❌ If the amount is considered excessive by tax authorities under Section 40A(2).
💡 Illustration
Example 1: XYZ Pvt Ltd pays ₹2 lakh as a performance-based commission to its employees. Since the payment is made to employees and is not in lieu of dividends, it is allowed as a deduction under Section 36(1)(ii).
Example 2: ABC Ltd pays ₹10 lakh to its shareholder-directors in the form of commission instead of dividends. Since this is effectively a profit distribution, it is not allowed as a deduction.
📌 Conclusion
✅ Bonus/commission paid to genuine employees is deductible under Section 36(1)(ii).
✅ The payment should not be an alternative to dividends.
✅ Deduction is available only on actual payment before the ITR due date.
✅ Ensure payments are reasonable to avoid disallowance under Section 40A(2).
💡 Proper documentation and adherence to these provisions ensure maximum tax benefits! 🚀
See lessWhat is zero coupon bond?
What is a Zero Coupon Bond? A Zero Coupon Bond (ZCB) is a type of debt instrument issued at a discount to its face value but does not pay any periodic interest (coupon). Instead, investors earn a return when they redeem the bond at its full face value upon maturity. Key Features of Zero Coupon BondsRead more
What is a Zero Coupon Bond?
A Zero Coupon Bond (ZCB) is a type of debt instrument issued at a discount to its face value but does not pay any periodic interest (coupon). Instead, investors earn a return when they redeem the bond at its full face value upon maturity.
Key Features of Zero Coupon Bonds
✅ Issued at a Discount: Bought at a lower price and redeemed at full value.
✅ No Interest Payments: Unlike regular bonds, there are no periodic interest payments.
✅ Fixed Maturity Value: Investors receive a pre-determined lump sum at maturity.
✅ Government or Corporate Issuance: Can be issued by the government, public sector undertakings (PSUs), or private companies.
Example
If a Zero Coupon Bond has a face value of ₹10,000 and is issued at ₹7,000, the investor earns a return of ₹3,000 (₹10,000 – ₹7,000) upon maturity.
Taxation of Zero Coupon Bonds in India
📌 As Capital Gains (For Investors Holding as an Investment)
The difference between redemption value and purchase price is taxed as capital gains.
Short-Term Capital Gains (STCG) – If sold within 12 months (listed ZCBs) or 36 months (unlisted ZCBs), gains are taxed as per slab rates.
Long-Term Capital Gains (LTCG) – If held beyond the respective period, LTCG tax applies at 10% without indexation under Section 112.
📌 As Business Income (For Traders or Companies)
If ZCBs are held as stock-in-trade, the gain is taxable as business income under Section 28.
📌 Tax Deducted at Source (TDS)
TDS may be applicable under Section 193 when the bond matures if issued by a company or financial institution.
Government-Notified Zero Coupon Bonds
As per Section 2(48) of the Income Tax Act, ZCBs notified by the Central Government enjoy special tax treatment, where the gain is taxed only on maturity and not annually.
Conclusion
Zero Coupon Bonds are an attractive option for long-term investors looking for fixed returns. However, investors should consider capital gains taxation and TDS provisions while investing in these instruments.
See lessWhat is the tax treatment of zero coupon bonds under Income Tax Act?
Tax Treatment of Zero Coupon Bonds under the Income Tax Act 1. What are Zero Coupon Bonds? Zero Coupon Bonds (ZCBs) are debt instruments issued at a discount to their face value but do not pay periodic interest. Instead, the investor earns a return when the bond is redeemed at its maturity value, whRead more
Tax Treatment of Zero Coupon Bonds under the Income Tax Act
1. What are Zero Coupon Bonds?
Zero Coupon Bonds (ZCBs) are debt instruments issued at a discount to their face value but do not pay periodic interest. Instead, the investor earns a return when the bond is redeemed at its maturity value, which is higher than the purchase price.
2. Taxation of Zero Coupon Bonds
✅ For Individual & Non-Business Holders:
The difference between the redemption value and the purchase price is treated as Capital Gains.
Holding Period Classification:
Short-Term Capital Gains (STCG): If held for ≤ 12 months (for listed ZCBs) or ≤ 36 months (for unlisted ZCBs), taxed as per slab rates.
Long-Term Capital Gains (LTCG): If held for > 12 months (for listed ZCBs) or > 36 months (for unlisted ZCBs), taxed at 10% without indexation under Section 112.
✅ For Businesses & Traders (Held as Stock-in-Trade):
Any gain on maturity is treated as business income under Section 28 and taxed at applicable slab rates.
✅ TDS Applicability:
If the ZCB is issued by a company or institution, TDS (Tax Deducted at Source) may apply at the time of maturity under Section 193, unless exempted.
3. Special Tax Treatment for Government-Notified ZCBs
As per Section 2(48) of the Income Tax Act, ZCBs notified by the Central Government enjoy special tax benefits.
The difference between issue and redemption price is not taxed annually but only on maturity as capital gains.
4. Practical Considerations
✔ Keep records of purchase price & redemption value for accurate tax computation.
See less✔ If investing in listed ZCBs, take advantage of the lower holding period for LTCG.
✔ Ensure TDS compliance if applicable.
What is the provision of section 43B under Income Tax Act?
Section 43B of the Income Tax Act, 1961 is a significant provision that deals with allowability of certain expenses on a payment basis. This section ensures that specific liabilities are deductible only when they are actually paid, irrespective of the method of accounting followed by the taxpayer. 1Read more
Section 43B of the Income Tax Act, 1961 is a significant provision that deals with allowability of certain expenses on a payment basis. This section ensures that specific liabilities are deductible only when they are actually paid, irrespective of the method of accounting followed by the taxpayer.
1. Key Provisions of Section 43B
As per Section 43B, the following expenses are allowed as a deduction only in the year of actual payment:
🔹 Taxes & Duties: Any tax, duty, cess, or fee payable under any law (e.g., GST, excise duty, customs duty, etc.).
🔹 Employer’s Contribution to Provident Fund (PF) & Other Welfare Funds: Employer’s contribution to PF, ESI, superannuation fund, gratuity fund, etc. is deductible only if paid before the due date under the respective law.
🔹 Bonus & Commission to Employees: Deductible only when paid.
🔹 Interest on Loans from Banks & Financial Institutions: Interest on borrowed capital from banks, public financial institutions, or NBFCs is allowed only if actually paid.
🔹 Leave Encashment: Deduction for leave encashment is allowed only if the amount is paid.
🔹 Payments to Railways: Any sum payable to the Indian Railways for freight charges is deductible only when paid.
2. Exception: Payment Before the Due Date of Filing ITR
An exception exists under the first proviso to Section 43B, which states that if the payment is made before the due date of filing the income tax return (ITR) under Section 139(1), the expense is still allowed in the same financial year. This is particularly relevant for loan interest, tax payments, and statutory contributions.
3. Disallowance & Impact on Businesses
If an assessee claims a deduction without making the actual payment, the tax authorities will disallow the expense, increasing the taxable income.
Non-payment of employer’s PF or ESI within the due date under the respective Act (not ITR due date) results in permanent disallowance, as per recent judicial rulings.
4. Key Amendments & Judicial Rulings
Amendment in Finance Act 2023: Clarified that employer’s contribution to PF/ESI is deductible only if deposited within the due date of the respective law, not the ITR due date.
SC Ruling in Checkmate Services (P) Ltd. case reaffirmed this principle, ensuring strict compliance with PF/ESI payment deadlines.
5. Practical Considerations
✅ Maintain proper records of payments to claim deductions.
✅ Ensure that statutory dues like GST, PF, and ESI are deposited on time to avoid disallowance.
✅ If payments are delayed, pay before filing ITR to claim deductions in the same year.
Conclusion
Section 43B is a crucial provision ensuring timely payments of statutory and financial liabilities. Businesses must align their accounting and payment cycles to avoid disallowances and ensure maximum tax benefits.
See less